The "opportunities" arise somewhat often: A large well-known name gets blindsided by a bad quarter, and other unsettling news, and the markets react swiftly and vigorously, "repricing" shares. Value investors try and assess whether the market has overly-punished the name in question, taking it much lower than is deserved. Call it "bottom-fishing", "buying on the dip", or just opportunistic, but it is a risky strategy that can be rewarding when you get it right or devastating when the knife continues to fall.
Kraft Heinz (KHC) is the latest example (it was one of my 2019 tax-loss selling recovery candidates). The name fell more than 27% on Friday after the company reported a fourth quarter earnings miss after Thursday's market close, along with a host of other surprising nuggets that sent investors to the sidelines. These included a 36% dividend cut (from 63 cents to 40 cents), $15.4 billion in write-downs for Oscar Meyer and Kraft brands, and to add insult to injury, an SEC subpoena regarding KHC's accounting policies. This potential "kitchen-sink" quarter sent KHC shares to an all-time low since Kraft and Heinz merged in 2015.
Perhaps surprisingly, this is not the type of situation that I live for, and I am not interested in "dumpster-diving" for KHC, at least at this point. Unlike the smaller names I might buy after they get destroyed following a bad quarter, or for a whole host of other reasons, KHC is a large-well-known name that is followed by more than 20 analysts. There's not a lot of information that has not already been picked over in such cases, where there is so much attention, which makes KHC's plunge all the more surprising. This is an area of the markets - large cap - believed to be among the most efficient.
I question whether a potential KHC recovery will be swift, or whether there are more shoes to drop. There's already talk of potential brand sales, and KHC reportedly hired Credit Suisse to seek options for KHC's Maxwell House coffee brand. If KHC starts to sell off brands then this could be a long road as the company attempts to pay down what amounts to about $31 billion in debt. The substantial dividend cut, which puts the forward yield at about 7.2%, was intended to help along those lines.
Of course, one of the wildcards here is Warren Buffet's Berkshire Hathaway (BRK.A) , (BRK.B) , which owned nearly 27% of KHC as of the end of 2018, and whether the company will take this "opportunity" to increase the stake, potentially pulling KHC out of the dumpster.
I for one am not interested here, despite the 7.2% yield and 9.5 forward price earnings ratio. There's a bigger chance, in my view, that the market actually has this one right, as opposed to some of the smaller, under-followed, off-the-radar distressed situations, where markets are far less efficient and that I prefer. That's not to say that KHC won't recover, but that said recovery may be drawn out, and shares could head lower from here.